Nepali Times: The mid-July numbers are in, how would you rate the health of the economy? Yuba Raj Khatiwada: We all know it isn't sound. Our concern is where all this could take us. The past fiscal year was generally unsatisfactory. Our real and external sectors did not do well. The external sector was affected by external shocks and domestic violence, which was expected, but we also have problems with the real sector in terms of the decline in domestic production, and the stagnation of agriculture. The overall growth was less than one percent, which meant our per capita income went down. The present growth rate is the lowest in 18 years.
Still, the fundamentals of the economy are sound. The output may have dropped, but the structure of the economy is still intact. We've seen some increase in investment, if only of the short-term kind. Prices are still manageable, the exchange rate is stable, and the reserve position is still comfortable. The monetary aggregates have been hit by the recession, but are also in place. Fiscal imbalance is a chronic problem, but the deterioration was not very different from 2000/01. Revenue collection increased by three percent, reasonable when GDP is growing at less than 1 percent, prices are up by less than 3 percent, and imports are down.
Where should we look for danger signs?
For stability, in the external sector. For the first time after 1995/96 we have a Balance of Payment (BOP) deficit of about Rs 2.5 billion in 2001/02. A large BOP deficit can lead to reserves depletion and exchange rate speculation. This hasn't happened, simply because imports are down. We can't be satisfied about our low price situation; it could be suppressed domestic demand, which could in the longer term affect domestic economic activity. A further slowdown in the domestic market could give a second blow to manufacturing, which has been hit by external shocks.
Third, agriculture cushioned us for most of the 1990s. It at least ensured food supply, so people could survive any hardship. Now agriculture may not be able to provide that cushion. The rains weren't on time, that could reduce paddy production, which is about a quarter of the agricultural GDP. In the case of other agricultural crops like wheat and vegetables, there's no incentive for farmers as we get cheap subsidised wheat and vegetables from India. We don't have subsidies here. If farmers' income does not rise, they cannot buy manufactured goods and services. That hits domestic demand and slows the economy down further, pushing us deeper into recession. If agriculture can't provide the traditional cushioning, we may slip even further.
Did the government contribute to this by over-borrowing and overspending?
The central bank has repeatedly cautioned the government on release of funds for development at the end of the fiscal year, but it happened this year, too. The about Rs 4.5 billion overdraft could have been prevented if the government had not released funds towards the end of the fiscal year. There may have been political compulsions and security reasons, but the central bank warned the government beforehand about the fallout, the skewing of the budgetary balance. Development spending was down 16 percent in terms of cash, which could be proportional to foreign loan receipt. Foreign loan disbursement decreased last year, which means new projects were not implemented. If the aid money had come and been mobilised effectively, it could have improved the external sector in terms of capital inflow and the increased investment would have caused the production to grow, and the real sector would have gained.
Have we entered a downward spiral?
In a way, yes. Low income will suppress domestic demand and discourage production of goods and services for domestic consumption. This might further discourage investment. Breaking this spiral calls for higher spending, probably through higher fiscal spending. This is where our hands are tied. The revenue does not support spending, donors are shying away, and excessive domestic borrowing might create more problems. By resorting to excessive central bank finance, we have already exacerbated the problem in the last two years. The only cushion is that our monetary growth this year was slower than last year, which has lessened the impact of the overdraft.
Could trade start looking up?
The Nepal-India treaty is one of the factors influencing trade. It took India months to send the new instructions to the customs points, and then we had our own delays in distribution of quotas. There was a delay in setting up the purchasing authority in India. About 40 of export to India was affected by procedural delays even after the treaty was renewed. We didn't have much new investment for new products, which affected exports to India. Now as there is no more confusion regarding the treaty and exports to India, new investment might come to promote our exports. I'm not very optimistic about Third Country exports unless we have new products. We've understood the limits on the carpet industry, and on the competitiveness of garments. We missed our chance to diversify exports in the early 90s. People advising us on external sector policy used to tell us 'as long as carpets and garments are doing well, you don't have to worry'. They said resources would shift to other areas when they stopped being competitive. I used to ask, how can industries shift to other products immediately.
How can we stop the economy from slipping further?
First, we need to expedite processing investment proposals in manufacturing and services-even if we have to be more flexible. If someone wants to come and invest even in this adverse situation we should give them easy entry. Next, we need to explore the trade and tourism potential in the Tibet market and think about trade based on re-exporting imports. Just reviving tourism can have a multiplier effects in other sectors and raise demand.
There are problems of governance, too. We are sometimes in situations where we can't use aid resources already in the country because of delays and other interests interfering in decision-making. We need effective devolution. Having the elections on time has economic impacts. An election will bring resources into the economy, which can generate demand for domestic products. We're talking about Rs 4-5 billion entering the economy. It can also help raise business confidence and short-term investment. Of course, the present political conflict has to end.
